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Chile has created a new specialized unit to conduct transfer pricing audits as part of a heightened focus on tax-evasion.

Juan Pablo GuerreroTax DirectorKPMG in Chile

During the second quarter of 2010, the Chilean government announced an anti-tax evasion plan that seeks to collect $1.3 billion over four years from increasing tax audits, basically on the VAT and income tax. In this sense, transfer pricing became one of the most important initiatives included within the framework of the plan. Therefore, the Chilean IRS (Servicio de Impuestos Internos or SII) has created a specialized unit (economists, lawyers and accountants) that will be in charge of conducting transfer pricing audits.

Additionally, from the beginning of 2011 the SII has published in different forums and in the press a “Draft Bill on Transfer Pricing.” The authority has repeatedly indicated that the change in the law is not to provide a new look at the topic. On the contrary, the essence of the regulation (to comply with the arm’s length principle) is maintained and it solely intends to provide certainty for legal aspects and clarify the methodology to the taxpayer.

According to the authority, the items that will be contained in this new regulation are the following:

Clarification of the accepted methodology:

Both the methodology accepted and the selection of the method will be consistent with OECD Guidelines (Chapter 2, OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, July 2010). The accepted methods will be: Comparable Uncontrolled Price Method, Cost Plus Method, Resale Price Method, Transactional Net Margin Method, and Profit Split Method. In the selection of the method, no hierarchy will be expected. The most appropriate method must be selected based on the transaction under analysis.

Transfer pricing information return:

Chilean taxpayers conducting transactions with foreign related entities will be required to file an information return detailing their cross-border intercompany transactions. The details of the contents of this return will be determined by the SII through a circular. However, it is expected (based on other countries’ experience) that the return will require the following information: types and amounts of all transactions with related parties; names, countries and tax ID numbers of all related parties; the transfer pricing method(s) used to test each transaction; and the gross or operating margin earned by the taxpayer in each transaction.

Advance Pricing Agreements:

The possibility of entering into voluntary Advance Pricing Agreements (APAs) will be allowed. The request for agreement will have to include a transfer pricing report.

As a rule, transfer pricing analyses will not be an obligation to taxpayers. These will have no probative value by themselves. Transfer pricing analysis will be background information which companies will be able to use to determine their transfer pricing policy. Notwithstanding the above, a well-performed transfer pricing analysis will simplify the audit.

Corresponding adjustments:

The limit for these types of sequential adjustments is estimated to be five retroactive years. ●